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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22749
Experience:  Taxes, Immigration, Labor Relations
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Nondeductible Contribution to traditional IRA and conversion

Resolved Question:

Nondeductible Contribution to traditional IRA and conversion to Roth.
Our income is too high for Roth contribution so we contribute to traditional IRA (fully nondeductible) and then convert to Roth. We have no savings in traditional IRA and convert entire amount nondeductible IRA contribution every year to Roth.

In 2012 me and my wife contributed 5000 each and and converted 5000 each before April 15 2012 for 2011. Then we converted to Roth the entire amount

We also contributed another 5000 each for year 2012 in december 2012 to trad IRA and converted entire amount to to Roth.

Thus in total we converted 20,000 from traditional IRA to roth IRA in 2012

We now got forms 1099-R each for 10, 000 distribution for year 2012 each (total 20,000). It is a bit confusing because one distribution was done from 2011 nondeductible IRA contribution and the other from the 2012 contribution

On form 8606 for each of us, do we enter in line 1 5000 for 2012 nondeductible contribution and then in line 2 another 5000 for the basis (due to 2011) contribution -even if made in 2012 before April 15 ? The conversions to Roth for 20,000 should not be should be taxable correct ?
Submitted: 11 months ago.
Category: Tax
Expert:  Lev replied 11 months ago.

Lev :

Hi and welcome to our site!
You did nondeductible traditional IRA contribution - correct? So that fact must be reported on form 8606.
On your 2012 tax return - form 8606 - line 1 - you report the amount you contributed for 2012 - $5000.
Form 8602 - line 2 - you report nondeductible traditional IRA contribution amounts from previous years - in your case that woudl be $5000 you contributed for 2011. That should be amount from 2011 form 8606 line 14 - see instructions page 6 right column - http://www.irs.gov/pub/irs-pdf/i8606.pdf
Any Roth IRA conversions you made in 2012 are 2012 conversions - "before April 15" is irrelevant as your 2011 tax return was not affected.

Lev :

On your 2012 8606 - line 14 will be zero because of your conversion in 2012 - so next year (2013) - you will use zero if you will file form 8606.
Your conversions to Roth will not be taxable in 2012 unless there were any earnings converted with your original contribution, however your basis in the traditional IRS will be reduced by the converted amount and no would be zero because all funds were converted.

Customer:

Yes all contributions were nonductible

Customer:

I see so the april 14 2012 nondeductible IRA contribution applies to 2011 but the April 14 2012 Roth conversion to 2012

Customer:

So now, going forward I can contribute nondeductible 5500$ each in 2013 to traditional IRA and then convert 5500$ to roth IRA and the distribution 5550$ each should still not be taxable. Correct ?

Lev :

Conversion from traditional IRA to Roth IRA occurred in 2012 - and is correctly reported on 1099R form for 2012. It is NOT a conversion for 2011 (regardless where and for what year your original contributions were made).
So far - conversions are reported on your 2012 tax return.
Contributions you made for 2011 are reported on 2011 tax return. Such contributions are allowed up to Apr 15, 2012 - but still these are 2011 contributions.

Lev :

Yes - that is kind-of a loophole when contributions into Roth IRA might be not allowed directly - but indirectly are allowed as contributions into traditional IRA with subsequent conversions. There used to be an AGI limit on conversion - but it was removed several years ago.

Customer:

OK. I just got confused by the fact that the 1099-R showed 20,000 $ distribution but there seems to be no tax consequence because the basis in traditional IRA was remembered from 2011.

Lev :

But we need to view contribution and conversion as two separate transaction. For contributions - the amount is limited every year and the deadline is Apr 15 of following year. However there is no amount limit or deadline for conversions.

Customer:

OK. But where on the tax return do we report the Roth conversions. Turbo tax asks me for it but I don't see it anywhere on the forms ?

Lev :

The 1099-R reports the fact of conversion into Roth IRA - and that the transaction occurred in 2012. So - it should be reported on your 2012 tax return.
Your basis is comes from 2011 form 8606 line 14 PLUS 2012 nondeductible contribution.
The Roth IRA conversion is reported on form 8606 line 8.

Customer:

From turbo tax it seems to be entered on Line 16 instead of 8. It got it from imported from 1099R.

Lev :

Yes - that should the same amount.
See on the form - 16 If you completed Part I, enter the amount from line 8.

Customer:

Line 8 is empty. Does not let me enter since it imported from 1099R. Is it because I converted ALL of the nondeductible IRA ?

Lev :

Line 17 should be $10k - your basis - and line 16 is expected to be zero.

Customer:

It show both line 16 and line 17 to be 10,000

Lev :

Sorry for typo - line 18 is expected to be zero.

Customer:

and 18 is 0 yes. But line 8 is empty. TurboTax doe not let me enter anything there

Lev :

It is Ok - they simply do not display zeros.

Lev :

But based on your information - your conversion is reported and it is not taxable - so you should be OK.

Customer:

OK so it is ok line 8 is empty and line 16 shows the conversion ?

Lev :

I do not see any issues - I think that is the way TurboTax implemented - but most likely you are correct - because the full amount is converted - there is no need to calculate percentage - and they skipped that part.

Lev :

Just verify - the line 14 is zero - so you do not have any basis - correct?

Customer:

Yes 14 is 0

Lev :

So - I think you set - your basis is reported as zero after 2012, your contribution and conversion are reported, none is taxable. All as expected.

Customer:

Thank you. Excellent service. What a horribly convoluted way for a wonderful tax savings :)

Lev :

Sorry for confusion. Unfortunately I have to agree with you. Please be aware that "way" was not created by design - it came up as a a result of several separate law changes - and nobody tried to prevent such workaround. That is just another example that the tax law has its own logic which may be only understood from historical prospective.

Customer:

OK. Thank you. I think I am grasping my tax return now.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22749
Experience: Taxes, Immigration, Labor Relations
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